facebookIf people expect an interest rate cut in a country, wouldn't there be an increase in LT bond purchases and would cause currency appreciation with rise in demand for these lt debt? - Seedly

Anonymous

18 Apr 2019

General Investing

If people expect an interest rate cut in a country, wouldn't there be an increase in LT bond purchases and would cause currency appreciation with rise in demand for these lt debt?

Example: currently aussie is having weak economic data that results in currecy depreciation, but shouldn't it also result in an increase? Or does the effect of people buying LT bonds get offset by people fleeing the currency and investing in aussie since interest rate is expected to fall so their deposits will earn lesser interest? But shouldn't affect if its bonds right, since bonds have fixed coupon?

Discussion (1)

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When there is interest rate cut, bond prices will increase while bond yield will decrease. It depends on the investor (short/long term) on whether they would want to sell or buy the bond. I dont think you can definitively say demand for the currency will increase and if there was, the change would not be significant enough to cause appreciation of currency.

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